Brexit pain will be less severe than feared, says economic think thank

Britain's Brexit slowdown will be less dramatic than first feared, but households will suffer as inflation is set to surge close to 4%, according to an influential think tank.

The National Institute of Economic and Social Research (NIESR) upgraded its forecasts for growth this year and next - to 2% in 2016, slowing to 1.4% in 2017.

NIESR said it believes the Bank of England would now hold interest rates at 0.25% until the second half of 2019.

Its gross domestic product (GDP) forecasts compare with a far more gloomy report in August, when it warned the UK faced a 50/50 chance of a technical recession as it pencilled in growth of just 1.7% this year and 1% in 2017.

They also follow last week's official figures showing resilient growth of 0.5% in the third quarter.

But NIESR said the UK was not out of the woods yet, cautioning the outlook "remains one of a slowing economy, confronted with significant risks".

It said the move to trigger Article 50 could hit growth further in 2017 and predicted the plunging pound would send inflation shooting up to about 4% in late 2017, which would affect consumer spending power.

But it said this was likely to be "only a temporary phenomenon", with inflation set to return to the Bank's 2% target in 2020.

Simon Kirby, head of macroeconomic modelling and forecasting at NIESR, said: "The positive out-turns for GDP growth in the near term are very welcome but these give little to no guidance as to what will be the long-run impact from leaving the EU.

"The depreciation of sterling has been the most striking feature of the post-referendum economic landscape. This will pass through into consumer prices over the coming months and quarters."

NIESR said the Bank would "look through" above-target inflation, choosing to begin raising rates only gradually from the end of 2019.

The Bank cut rates to 0.25% from 0.5% in August and is expected to keep the cost of borrowing on hold this Thursday when it announces its latest decision alongside the quarterly inflation forecast report.

Given the latest figures, the Bank is likely to revise up its GDP growth forecasts for both 2016 and 2017, and nudge up inflation expectations after consumer prices jumped 1% in September amid rising clothes and fuel costs.

Key policymakers including governor Mark Carney have already suggested the Bank might allow inflation to overshoot its target if it is driven by sterling weakness.

In its latest quarterly report, NIESR also gave predictions for the global economy, keeping its forecast unchanged for growth of 3% in 2016 - the slowest annual growth rate since the 2009 recession.

It expects world growth to rise to 3.2% next year and 3.6% in 2018, but to remain slower than before the global financial crisis.